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Affine Term-Structure Models: Theory and Implementation

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  • David Jamieson Bolder

Abstract

Affine models describe the stylized time-series properties of the term structure of interest rates in a reasonable manner, they generalize relatively easily to higher dimensions, and a vast academic literature exists relating to their implementation. This combination of characteristics makes the affine class a natural introductory point for modelling interest rate dynamics. The author summarizes and synthesizes the theoretical and practical specifics relating to this analytically attractive class of models. This summary is accomplished in a self-contained manner with sufficient detail so that relatively few technical points will be left for the reader to ponder. As such, this paper represents a first step towards advancing the Bank of Canada's research agenda in this area, with a view to using these models to assist with practical debt and risk-management problems currently under study.

Suggested Citation

  • David Jamieson Bolder, 2001. "Affine Term-Structure Models: Theory and Implementation," Staff Working Papers 01-15, Bank of Canada.
  • Handle: RePEc:bca:bocawp:01-15
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    References listed on IDEAS

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    16. Duan, Jin-Chuan & Simonato, Jean-Guy, 1999. "Estimating and Testing Exponential-Affine Term Structure Models by Kalman Filter," Review of Quantitative Finance and Accounting, Springer, pages 111-135.
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    Cited by:

    1. Paccagnini, Alessia, 2016. "The macroeconomic determinants of the US term structure during the Great Moderation," Economic Modelling, Elsevier, pages 216-225.
    2. Fendel, Ralf, 2004. "Towards a Joint Characterization of Monetary Policy and the Dynamics of the Term Structure of Interest Rates," Discussion Paper Series 1: Economic Studies 2004,24, Deutsche Bundesbank, Research Centre.
    3. David Jamieson Bolder & Tiago Rubin, 2007. "Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis," Staff Working Papers 07-13, Bank of Canada.
    4. Chadha, Jagjit S. & Waters, Alex, 2014. "Applying a macro-finance yield curve to UK quantitative Easing," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 68-86.
    5. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 1-100.
    6. Silva, Hugo E. & Verhoef, Erik T. & van den Berg, Vincent A.C., 2014. "Airlines’ strategic interactions and airport pricing in a dynamic bottleneck model of congestion," Journal of Urban Economics, Elsevier, pages 13-27.
    7. Pietro Dallari & Antonio Ribba, 2015. "Economic Shocks and their Effects on Unemployment in the Euro Area Periphery under the EMU," Center for Economic Research (RECent) 114, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
    8. Sanford, Andrew D. & Martin, Gael M., 2005. "Simulation-based Bayesian estimation of an affine term structure model," Computational Statistics & Data Analysis, Elsevier, pages 527-554.
    9. Somvang PHIMMAVONG & Ian FERGUSON & Barbara OZARSKA, "undated". "Economy-Wide Impact of Forest Plantation Development in Laos Using a Dynamic General Equilibrium Approach," EcoMod2010 259600131, EcoMod.
    10. Robert Jarrow & Hao Li, 2014. "The impact of quantitative easing on the US term structure of interest rates," Review of Derivatives Research, Springer, pages 287-321.
    11. David Jamieson Bolder, 2003. "A Stochastic Simulation Framework for the Government of Canada's Debt Strategy," Staff Working Papers 03-10, Bank of Canada.
    12. Fendel, Ralf, 2008. "A Joint Characterization of German Monetary Policy and the Dynamics of the German Term Structure of Interest Rates," Review of Applied Economics, Review of Applied Economics, vol. 4(1-2).
    13. Yener Altunbas & Leonardo Gambacorta & David Marques-Ibanez, 2010. "Does monetary policy affect bank risk-taking?," BIS Working Papers 298, Bank for International Settlements.
    14. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 1-100.
    15. Bellini, Tiziano & Riani, Marco, 2012. "Robust analysis of default intensity," Computational Statistics & Data Analysis, Elsevier, pages 3276-3285.
    16. David Jamieson Bolder & Simon Deeley, 2011. "The Canadian Debt-Strategy Model: An Overview of the Principal Elements," Discussion Papers 11-3, Bank of Canada.
    17. Peter Spreij & Enno Veerman & Peter Vlaar, 2008. "Multivariate Feller conditions in term structure models: Why do(n't) we care?," DNB Working Papers 173, Netherlands Central Bank, Research Department.
    18. Juneja, Januj, 2014. "Term structure estimation in the presence of autocorrelation," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 119-129.
    19. Guillermo Andrés Cangrejo Jiménez, 2014. "La Estructura a Plazos del Riesgo Interbancario," DOCUMENTOS DE TRABAJO 012172, UNIVERSIDAD DEL ROSARIO.
    20. Argyropoulos, Efthymios & Tzavalis, Elias, 2015. "Real term structure forecasts of consumption growth," Journal of Empirical Finance, Elsevier, pages 208-222.
    21. David Bolder & Shudan Liu, 2007. "Examining Simple Joint Macroeconomic and Term-Structure Models: A Practitioner's Perspective," Staff Working Papers 07-49, Bank of Canada.
    22. Horny, Guillaume & Picchio, Matteo, 2010. "Identification of lagged duration dependence in multiple-spell competing risks models," Economics Letters, Elsevier, pages 241-243.
    23. Daniela Neykova & Marcos Escobar & Rudi Zagst, 2015. "Optimal investment in multidimensional Markov-modulated affine models," Annals of Finance, Springer, pages 503-530.

    More about this item

    Keywords

    Interest rates; Econometric and statistical methods; Debt management;

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G0 - Financial Economics - - General

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